Compliance challenges in fraud and corruption

How compliance expertise mitigates corruption and fraud

The Foreign Corrupt Practices Act (FCPA) of the United States (US) targets official bribery outside the US. In early November 2018, the US Justice Department levied criminal charges against Timothy Leissner, former partner for investment bank, Goldman Sachs Group Inc., in Asia, for his involvement in fraud involving 1Malaysia Development Berhad (1MDB), the Malaysian sovereign wealth fund.

Leissner pleaded guilty to conspiracy to launder money and conspiracy to violate the FCPA. The bank's system of internal accounting controls was described by US prosecutors as "easily circumvented" and further described its South East Asia banking culture as "highly focused on consummating deals, at times prioritizing this goal ahead of the proper operation of its compliance functions."

According to court documents, Compliance staff had blocked Leissner's efforts to get the bank to accept Low Teik Jho as a client on the grounds that due diligence on Low produced red flags that arose the suspicions of Compliance on the source of his (Low) money. Leissner had concealed Low's involvement and pushed deals through the bank's control functions, ultimately generating USD600 million in fees for Goldman Sachs. As part of his plea deal, Leissner agreed to forfeit a sum of USD43.7 million to US authorities as a "result of his crimes."

Such high level circumvention of Compliance denotes some of the challenges the function faces when controls and governance are pitted against potentially lucrative or direly required business deals. Examples of business dilemmas that necessitate adherence to compliance advice include the following:

• In the absence of a well-defined organizational hospitality policy, where is the tipping point between generous entertainment and bribery when trying to obtain contracts in private or public sectors

• In a developing country, should contributions to a politician's favoured 'charity' be made when these could help influence legislation that might be favourable to the company

• In an economic downturn, can a gift to a government inspector be overlooked in an effort to save a plant from temporary shutdown

• In a sales crunch, do unfavourable due diligence reviews on new clients play any part in decisions to secure urgently needed business.

In the 2018 Report to the Nations published by the Association of Fraud Examiners, the 2017 Global Fraud Survey focus on Asia Pacific Region revealed that 51% of the most common occupational fraud was corruption and that 47% of these were uncovered through a tip. Hotlines (whistleblowing channels) accounted for 74% of the most common anti-fraud controls. In compliance reviews, fraud and corruption are highlighted through red flags.

Within the procurement function matters that call for a more thorough check include dramatic changes in the volume of purchases from certain vendors that cannot be justified, discrepancies in the bidding process and sole sourced vendors that have not gone through the proper vetting channels. Within the financial function, matters that pique the interest of the compliance function include significant adjustments to critical accounts that are not typical for the business, extensive use of suspense accounts, adjustments to financial statements post financial close and opaque accounting transactions involving offshore special purpose vehicles incorporated in tax exempt jurisdictions.

Fraud perpetrated against certain processes have a much stronger impact on the company due to potential financial, compliance or operational implications on the organization. Assessing fraud risks and investing in controls to mitigate the identified risks are largely dependent on a balance of likelihood and impact. Higher fraud risks generate more attention and resources. Yet, a zero tolerance to corruption means that there are times when business must be sacrificed to safeguard an organisation's exposure to fraud.

And in the final analysis, the challenge for compliance would be to assist the organization to strike the appropriate balance between business needs and the fight against corruption and fraud.

©RC Compliannce Consultancy-2019

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